The euro is on its longest losing streak ever

The euro on Friday was headed for a 10th straight loss against the U.S. dollar, and investors are taking notice as the shared currency extends its longest losing streak since its inception.

The path for the euro doesn’t look much rosier in the short term, with an Italian referendum and the prospect for further monetary stimulus from the European Central Bank among its potential hurdles.

The euro
EURUSD, +0.0341%
on Thursday marked its ninth straight decline against the greenback, the longest string of losses since the euro started trading December 1999. It hit an intraday low of $1.0582 on Friday, and that followed Thursday’s dip below $1.06.

“On a technical basis, the market is looking pretty stretched now. However, the momentum is very strong against the euro at the moment. As exactly how long it will continue, that remains to be seen,” said Richard Perry, market analyst at Hantec Markets.

He said the next level to watch is $1.0538 as that is the December 2015 low. The $1.0456 level is the March 2015 low and that “is a massive, massive support [area]. If that goes, then you’re looking at parity.”

Dollar strength: Much of the move can be attributed to dollar strength rather than euro weakness, said Perry. The closely watched ICE Dollar Index
DXY, -0.04%jumped to a 13-year high, in part as the greenback pushed above ¥110 against the Japanese yen
USDJPY, -0.24%
for the first time since May.

Those moves were fueled as Federal Reserve Chairwoman Janet Yellen told lawmakers Thursday that a rate increase could come “relatively soon.” The Fed will next meet on Dec. 14.

“There’s an element of the bond market driving the dollar move and that’s having an impact across the yen and also euro,” said Perry, who noted that yield curves in Japan and throughout Europe “are relatively flatter versus the lead Treasury yield curves, so therefore you start to see interest-rate differentials playing out more.”

Higher interest rates relative to other countries tend to attract currency inflows as investors search for stronger yields. The yield on the U.S. TreasuryTMUBMUSD10Y, +0.75%
on Thursday settled at 2.278%, its highest close since late December.

U.S. bond prices in recent sessions have dropped, sending yields higher, as investors expect President-elect Donald Trump to introduce inflation-inducing spending efforts, which could lead to more rate increases from the Fed.

European waves: Meanwhile, the European Central Bank this week has sounded open to extending monetary stimulus if policy makers determine that’s what’s need to keep the eurozone economy on the recovery path. Monetary stimulus can pressure a currency’s value.

Goldman Sachs in an note issued Friday said it’s kept its call for euro-dollar parity on a 12-month horizon. “The principal risk to this trade is a premature tapering from the ECB, which could cause EUR/$ to rally, but this isn't something we anticipate given the difficult political calendar and the fact that the ECB will want, in our baseline case, to shield European rates from the increase in their U.S. counterparts,” analysts said.

The ECB will meet before the Fed, on Dec. 8. But before that is the Dec. 4 constitutional referendum in Italy. A loss would mark a defeat for Italian Prime Minister Matteo Renzi’s Democratic Party, making it more difficult for the government to pass fiscal reforms and potentially prompting Renzi to dissolve his government.

“Following from the politics behind Trump’s victory…you’ve got the Italian referendum, [a general election] in the Netherlands in March, France in April/May and Germany later in the year,” said Perry.

“In the next 12 months, you’ve got massive elections that could do a tidal change of sentiment against the euro. So the Italian referendum could be the first indications in the eurozone that the populist movement is gaining ground.”

In particular, analysts are eyeing the potential for political gains by the euroskeptic 5 Star Movement.

“Renzi has again renewed this threat to resign if the referendum does not pass,” said currency analysts at Brown Brothers Harriman in a note. “The referendum appears to be losing support, and there is already a discussion of likely candidates to replace Renzi.”

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